4 After studying this chapter, you should be able to:Learning ObjectivesAfter studying this chapter, you should be able to:Distinguish the operating activities of a service business from those of a merchandising business.Describe and illustrate the financial statements of a merchandising business.Describe the accounting for the sale of merchandise.Describe the accounting for the purchase of merchandise.Continued

5 Learning ObjectivesDescribe the accounting for transportation costs and sales taxes.Illustrate the dual nature of merchandising transactions.Describe the accounting for merchandise shrinkage.Describe and illustrate the use of gross profit and operating income in analyzing a company’s operations.

6 Learning Objectives1Distinguish the operating activities of a service business from those of a merchandising business.

7 In prior chapters, you were introduced to how to report the financial condition and changes in financial condition for a service business.

8 In this chapter, you will be exposed to the accounting for merchandise operations.

9 Condensed Income StatementHome Depot Inc.Condensed Income StatementFor the Year Ending December 28, 2001(in millions)Net sales $45,738Cost of merchandise sold 32,057Gross profit $13,681Operating expenses 9,490Operating income $ 4,191Other incomeIncome before taxes $ 4,217Income taxes 1,636Net income $ 2,581Net sales is the revenue received from selling merchandise less any merchandise returned or any discounts reported.The revenue account for merchandise is Sales.The cost of merchandise sold is matched against net sales.Revenue minus cost provides gross profit.What’s different on a merchandising income statement?

10 Learning Objectives2Describe and illustrate the financial statements of a merchandising business.

11 Multiple-Step Income StatementOnline SolutionsIncome StatementFor the Year Ended December 31, 2007Net sales $708,255Cost of merchandise sold 525,305Gross profit $182,950Operating expenses 105,710Operating income $ 77,240Other income and expense (net) (1,840)Operating income before taxes $ 75,400Income taxes ,000Net income $ 60,400

12 Multiple-Step Income StatementSales $720,185Less sales returns and allowances $6,140Less sales discounts 5, ,930Net sales $708,255Sales is the total amount the customers are charged for merchandise sold, including cash sales and sales on account.Detailed Revenue Section

16 Multiple-Step Income StatementPurchases $521,980Less: Purchases returns and allowances $9,100Purchases discounts 2, ,625Net purchases $510,355Add transportation-in ,400Cost of merchandise purchased $527,755A Purchase allowance is a reduction in purchase price because the item has a defect or was the wrong item ordered.A Purchase return is the cost of the merchandise returned to the seller.

17 Multiple-Step Income StatementPurchases $521,980Less: Purchases returns and allowances $9,100Purchases discounts 2, ,625Net purchases $510,355Add transportation-in ,400Cost of merchandise purchased $527,755A Purchase discount is a reduction in the initial cost of the merchandise. Usually, it is due to early payment of the debt.

18 Multiple-Step Income StatementPurchases $521,980Less: Purchases returns and allowances $9,100Purchases discounts 2, ,625Net purchases $510,355Add transportation-in ,400Cost of merchandise purchased $527,755Transportation-in is the shipping cost paid by the buyer for merchandise. Note that this freight payment increases the cost of the merchandise. It is not an expense.

19 Multiple-Step Income Statement“Cost of merchandise purchased” is a major portion of the cost of merchandise sold section, which follows the revenue section.

20 Multiple-Step Income StatementNote on the next slide that the only change is that the section begins by adding the beginning inventory and ends by subtracting the ending inventory.

31 3 Describe the accounting for the sale of merchandise.Learning Objective3Describe the accounting for the sale of merchandise.

32 Transactions involving MasterCard or Visa are treated as cash sales.On January 3 Online Solutions sells merchandise costing $1,200 for $1,800. The customer charges the purchase on a MasterCard.Transactions involving MasterCard or Visa are treated as cash sales.

33 Cash sales of $1,800 on January 3; cost of merchandise sold, $1,200.

34 2/10, n/30 Credit Terms The net (full) amount is due by the 30th day.Sales DiscountsCredit Terms2/10, n/30The net (full) amount is due by the 30th day.The buyer is allowed a 2% discount if……the account is paid within 10 days.

47 July 1. Scully Company sold merchandise on account to Burton CoJuly 1. Scully Company sold merchandise on account to Burton Co., $7,500, terms FOB destination; 2/10, n/30. The cost of the merchandise sold was $4,500Scully Co. (Seller)

48 July 1. Scully Company sold merchandise on account to Burton CoJuly 1. Scully Company sold merchandise on account to Burton Co., $7,500, terms FOB destination; 2/10, n/30. The cost of the merchandise sold was $4,500Burton Co. (Buyer)

50 July 6. Scully Company issued Burton CoJuly 6. Scully Company issued Burton Co. a credit memorandum for merchandise returned, $1,000. The merchandise had been purchased by Burton Co. on account on July 1. The cost of the merchandise returned was $600.Scully Co. (Seller)

51 July 6. Scully Company issued Burton CoJuly 6. Scully Company issued Burton Co. a credit memorandum for merchandise returned, $1,000. The merchandise had been purchased by Burton Co. on account on July 1. The cost of the merchandise returned was $600.Burton Co. (Buyer)

52 July 11. Scully Company received payment from Burton CoJuly 11. Scully Company received payment from Burton Co. for purchase of July 11, less discount (2% x $6,500).Scully Co. (Seller)

53 July 11. Scully Company received payment from Burton CoJuly 11. Scully Company received payment from Burton Co. for purchase of July 11, less discount (2% x $6,500).Burton Co. (Buyer)

55 When a company uses a perpetual inventory, a physical count is taken at the end of the accounting period to determine the accuracy of the perpetual records and to record any inventory shrinkage.

56 Inventory shrinkage is $1,800Online Solutions’ inventory records indicate that $63,950 of merchandise should be available for sale on December 31, The physical inventory taken on that date indicates that only $62,150 of merchandise is available for sale.Inventory shrinkage is $1,800

57 Learning Objective8Describe and illustrate the use of gross profit and operating income in analyzing a company’s operations.

58 …the efficiency and effectiveness of a merchandiser’s operations.Gross profit and operating income are two important profitability measures analyst use in assessing…